Schrödinger’s Capital: Value theory and economic depressions

by Jehu

NOTE 16: Who are you going to believe? Your lying eyes or the BLS?

If not all labor creates value, how can we distinguish labor that creates value from labor that does not create value. Marx proposed that labor that creates value must be expressed as exchange value; which is to say, value producing labor contained in one commodity must be expressed in the bodily form of another commodity having value for which the first product of value creating labor is exchanged.

Marx’s definition provides a testable statement regarding value:

If a product of labor has value, this value must be expressed as exchange value.

An important caveat to Marx’s theory must be stated here: while the value of a product of labor must be expressed as exchange value, the converse statement will not necessarily be true: the value of a product of labor will be expressed in the form of exchange value, but not every object with exchange value actually has value.

The value-form school’s definition of value directly contradicts Marx’s argument in that, for value-form theory, value does not necessarily take the form of exchange value, but only some definite quantity of the material of a “value-form” (i.e., a money), irrespective of whether this material itself has value or not. Thus the value-form school also produces a testable statement:

If a product of labor has value, it will have a price denominated in some material granted forced circulation by the State, and having the key determination of immediate exchangeability. (Arthur, 2003.)

According to Heinrich in his Introduction to the three volumes of Capital, there is no reason to prove value exists. However, the problem we face is not whether we need prove value itself exists, but which of these two distinct and incompatible definitions of value is accurate.

Distinct and incompatible definitions of value

Now here is the thing: It may have been true during Marx’s lifetime that these two distinct and incompatible definitions of value had no real world implications, but this is no longer the case.

Why?

Until 1971, these two expressions of the value of commodities were virtually identical because material granted forced circulation by the State was pegged to a commodity money (gold). A valueless fiat currency, the dollar, was legally defined as the equivalent of 1/35th of a troy ounce of gold. Thus, whatever gold said was the magnitude of value contained in a commodity, the dollar symbolically expressed this value as a numeraire, as so many units of currency.

If the value of the commodity denominated in gold rose, the numeraire price rose with it. If the value of the commodity denominated in gold fell, the numeraire price fell with it. Over the same period, the two measures may have had an uneasy relation, but these fluctuations were minor and were forcibly adjusted by the state as it attempted to maintain the dollar’s peg to gold.

However, after 1971, when Nixon left the Bretton Woods agreement and the dollar was allowed to float against gold, we no longer see this pattern. Instead US GDP measured in currency begins to diverge dramatically from US GDP measured in gold:

A comparison of US GDP as measured in gold and US dollars 1971-2010 (Sources: BLS, Kitco)

Detaching the dollar from gold had the effect of producing two distinct and incompatible measures of value; one that agrees with Marx (gold) and one that agrees with the value-form school (paper dollars).

Now, the argument may be made that gold was no longer money after 1971, but this is not true. In fact, money serves a number of functions performed by different materials. The functions of money are quite distinct and often settle on different money-forms. For instance, while it may be true that, in many cases, paper currency functioned in the economy as an immediate means of exchange to purchase groceries, this function taken up by paper currency had no impact on physical gold’s ability to function as money in the form of a hoard.

After 1971, gold was still a valid money-form for certain functions like hoarding, but other functions of money had devolved on different materials in our economy like paper currency. Basically, a valueless debased currency served as means of exchange, but gold remained money in the function of hoard and as an independent measure of the values of commodities according to labor theory.

We thus have two different pictures of US economic performance after 1971, coinciding with two different and incompatible definitions of value functioning side by side. Thus we can compare these incompatible definitions of value for all the years since 1971.

According to Marx’s definition of value, the capitalist economy has not grown at all in 45 years. It is actually smaller than it was in 1971; while, according to the value-form school’s definition of value, the economy is about 14 times larger than it was in 1971. Both of these pictures of the economy cannot be correct.

Distinct and incompatible versions of US economic history

According to Christopher Arthur and the value-form school, money ‘posits the presupposition’ that commodities count as values. Based on this definition of value, Arthur asserts, commodity money is not necessary to perform this function. Paper can function in place of a commodity as measure of value, because it is the material of the thing serving as money itself that posits commodities as value.

Based on Arthurs definition of money, which assumes value is a property posited on commodities by money, I have produced a chart of US GDP from 1920 to 2010:

US GDP as measured in dollars 1920-2010 (Sources: BLS, Kitco)

By contrast, with Marx, value is an objective property of commodities that can only be expressed as exchange value. Only commodity money can express the value of commodities because it, like the commodities whose values it measures, has value of its own. Below I have produced a chart of US GDP from 1920 to 2010, using Marx’s definition of value as an objective property of commodities:

US GDP as measured in ounces of gold 1920-2010 (Sources: BLS, Kitco)

Depending on which definition of value we employ, Marx’s or the value-form school’s, the economic history of the US for the last 95 years looks remarkably different.

The Great Depression of the 1930s barely shows up in the chart employing Arthur and the value-form school’s definition of value and money; while in Marx’s definition, not only does the Great Depression appear, there are appear to be two more depressions in the 1970s and again since 2001

The possible depressions beginning respectively in 1929, 1971 and 2001 are shown in the chart below:

US GDP as measured in gold with periods of depressions highlighted, 1920-2010 (Sources: BLS, Kitco)

According to the value-form school’s definition of value, the depression of the 1970s and the current depression, which started in 2001, do not even exist. This would suggest the definition of value and of money is not a mere academic problem; depending on which definition is employed, ‘reality’ differs.

To put this bluntly, according to Arthur’s definition, the crisis of the 1970s never happened. Since the crisis of the 1970s never happened, we have no explanation for why the Keynesian “social state” based on collaboration or compromise between classes collapsed and was replaced by neoliberalism. We are left with crude approximations, political explanations, for the collapse of the Keynesian state and the rise of neoliberalism. Which is to say, based on the value-form school’s definition of value and money, the Keynesian state collapsed and neoliberalism arose because Maggie Thatcher was a heartless bitch.

Conclusion

The definition of value advanced by the value-form school and the definition of value proposed by Marx in Capital generates two distinct and incompatible pictures of reality that we can empirically test against one another. There is no reason to assume, as Heinrich maintains, that value does not require proof when the entire problem posed by the charts I have presented above is which definition of value are we to believe.

As with any science, this question can only be answered by rigorous testing of the empirical data.